Investor lawsuit against Lydian Bank CEO dismissed, questions remain

WEST PALM BEACH — A federal judge dismissed an investor lawsuit against former Lydian Private Bank Chairman and CEO Rory A. Brown, but questions about revelations concerning a loan to a company that invested in the failed bank remain.

The discovery phase of the lawsuit revealed that the bank made a $20 million loan to Charleston, S.C.-based Sherman Financial Services at about the same time the company purchased $15 million in Lydian stock. Soon after, Lydian purchased loans from Sherman Financial Group, an affiliate of the company. The Office of Thrift Supervision, Lydian’s former regulator, made the bank restate its 2008 financials during 2010 to remove the $15 million in capital from this deal.

Although the Lydian investor suit was dismissed, it raised an issue similar to one that emerged from the failed Orion Bank in Naples. It is normally improper for a bank to lend money to a party for the purpose of that party buying stock in the bank. Jerry J. Williams, former CEO of Orion, was sentenced to six years in prison for covering up that loans made by the bank were used to purchase its stock.

Digital Domain stock offered as incentive

Lydian, which was based in Palm Beach, had about $1.7 billion in total assets and $1.24 billion in total deposits before it failed in August 2011. The bank had offices in Tampa and in Sarasota with a combined total of about $70 million in deposits. Sabadell United Bank acquired the branches and assumed the deposits, and agreed to purchase most of the assets under a loss-sharing agreement with the Federal Deposit Insurance Corp.

Tarrytown, N.Y.-based BVS Acquisition Co. and Connecticut resident Arthur W. Hooper Jr. filed a lawsuit in March, accusing Brown of negligent misrepresentation and breach of fiduciary duty for misleading them as they invested $10 million in the bank in 2009. They alleged that its 2008 financial statements were incorrect, a claim echoed by a regulatory review of Lydian’s failure by the U.S. Department of the Treasury’s Office of Inspector General, stating that the bank under-reported its bad loans in 2008.

Their investment was wiped out when Lydian failed. The bank’s failure has cost the FDIC $292 million.

U.S. District Judge Donald M. Middlebrooks dismissed the complaint on Oct. 30, ruling that investors should have relied only on the information in the stock subscription agreement, not what Brown told them, and that Brown owed them no fiduciary duty. The judge noted that the two investors had the opportunity to request the bank’s audited financial statement and seek further financial information, but they did not, so they have no right to claim the financial statements were misleading.

The investors met with Brown twice, according to Middlebrooks — once to discuss investing in Lydian and once to discuss giving BVS and Hooper stock warrants in Digital Domain, a Port St. Lucie-based company that declared Chapter 7 bankruptcy this year, as an “incentive” to invest in Lydian. Former Digital Domain CEO John Textor was a founder and former board member of Lydian, which previously invested in and loaned money to Digital Domain.

Miami attorney Mark F. Raymond, who represented BVS and Hooper in the lawsuit, couldn’t be reached for comment.

Middlebrooks did not rule on whether the statements Brown made to the investors were misleading or not. As to the accusation that Lydian did not follow accounting rules in its financial statements, Middlebrooks said that claim belongs to the FDIC, not investors.

Joel M. Miller, an attorney who represents Brown in the lawsuit, said Brown was truthful when meeting with the investors. While the OTS told Lydian to restate its 2008 financial report two years later because of the Sherman transaction, the bank believed its financial report was correct at the time, Miller said. They were audited by PricewaterhouseCoopers, which believed the Sherman transaction was presented accurately, he added.

No charges have been filed against Brown, or anyone else, concerning the Sherman transaction. However, two former Lydian senior employees told the South Florida Business Journal that federal regulators, including the FBI, have interviewed them concerning Lydian and the Sherman transaction.

The OIG report in March stated that there were multiple investigations by various government agencies addressing “questionable activities” at Lydian.

Miller said he has no knowledge of any federal investigation involving Brown.